Corporations

Question 1

Promoters

Answer 1

Liable for pre-incorporation transactions until a novation occurs.

Question 2

Certificate of formation formalities

Answer 2

1) Name (with corporation markers, and cannot be misleading). Can be reserved for 120 days.
2) Purpose
3) Authorized shares (classes, number and par value)
4) Duration (by default, perpetual)
5) Name and address of corporate agent
6) Organizer’s name and address
7) Initial directors

Question 3

De Facto corporation

Answer 3

Acting in good faith under the corporate name, but some formality was missed.

Question 4

Shareholder Meeting Notice Requirements

Answer 4

• Must be sent to all shareholders, regardless of whether they can vote, at least 10 days prior but no earlier than 60 days prior. Requires 21 days’ notice for a fundamental transaction.
• Must include the matters to be addressed, place, day and meeting time.
• First-class mail, personal notice or electronic transmission (if consented to)

Question 5

Record date limit

Answer 5

Cannot be more than 60 days prior to the meeting

Question 6

Minimum quorum

Answer 6

1/3

Question 7

Cumulative voting law

Answer 7

Opt-out before 9/1/03, opt-out later

Question 8

Irrevocable proxies

Answer 8

Must state it is irrevocable and must be coupled with an interest.

Question 9

Voting pool

Answer 9

Majority choice rules the whole block, and can be specifically enforceable.
Must be deposited with the corporation at its principal or registered office.

Question 10

Inspection rights

Answer 10

Requires at least 5% of the outstanding shares or must have been a shareholder for at least 6 months

Question 11

Derivative Suits Procedures

Answer 11

• Standing (shareholder at the time of the event)
• Written board demand - must give the company 90 days unless waiting would cause irreparable harm.
• Majority of disinterested directors must then decide whether to dismiss it because it is not in the corporation’s best interests.

Question 12

Piercing corporate veil factors

Answer 12

• Undercapitalization
• Disregard of corporate formalities
• Commingling of corporate assets
• Self-dealing
• Fund siphoning
• Use of corporate form to avoid legal obligations
• Impermissible control or domination over the corporation
• Wrongful, misleading, or fraudulent dealings with a corporate creditor

Question 13

Director proxy voting

Answer 13

Not allowed in TX

Question 14

Director dissent

Answer 14

• Promptly object to the holding of the meeting
• Ensure that director’s dissent or objection is noted in the meeting minutes; or
• Not vote in favor of the action and deliver written notice of dissent to the presiding officer before meeting adjourns or to the corporation immediately after the meeting adjourns.

Question 15

Duty of care violations

Answer 15

• Oversight failure

- Decision-making failure (process inquiry)

Question 16

Duty of Loyalty

Answer 16

• Conflicting interest transactions (Disclose to disinterested directors who can cleanse, otherwise board will evaluate fairness)
• Usurpation of corporate opportunity (present and let corporation accept or reject opportunity)
• Not to compete
• Salaries

Question 17

Indemnity

Answer 17

• Mandatory for completely successful defense
• prohibited for improper financial benefit
• may indemnify for good faith violations

A corporation may indemnify an officer when:
(1) the officer acted in good faith with the reasonable belief that his conduct was in the best interests of the corporation, or that his conduct was at least not opposed to the best interest of the corporation; and

(2) in the case of a criminal proceeding, the officer did not have reasonable cause to believe that his conduct was unlawful.

Question 18

Par value

Answer 18

Minimum price for which corporation can issue its shares

Question 19

Watered stock

Answer 19

Sold under par

Question 20

Treasury stock

Answer 20

Previously-issued stock that the corporation repurchases.

Question 21

Preemptive rights

Answer 21

Do not apply (unless otherwise stated in COF):

• Stock issued for services or property;
• Stock sold or granted as a form of compensation
• Shares issued within 6 months of formation
• Preferred or nonvoting shares
• Shares with preemptive rights not acquired within the 1st year of offering

Question 22

Shareholder approval of merger

Answer 22

2/3 (unless otherwise specified in COF)

Question 23

Shareholder approval of capital reductions

Answer 23

For no par value shares, requires majority shareholder approval

Question 24

Appraisal exceptions

Answer 24

• Market-out

- 90% ownership

Question 25

Appraisal procedure

Answer 25

1) Shareholder notification to president and secretary
2) No favorable vote
3) Written demand for payment:
- Addressed to the corporation’s president and secretary
- Order for fair value
- Return address
- Number and class of shares along with fair value estimate
- Within 20 days of notice that the action was approved
- Relinquish share certificates within 20 days of making demand
4) Corporation must respond within 20 days of demand
5) Make payment within 90 days if corporation agrees, or 120 days after agreement if it originally disagreed

Question 26

Shareholders’ involuntary termination

Answer 26

• Deadlocked, if corporation suffering or is threatened with irreparable injury
• Deadlock in shareholder voting power that hasn’t been broken in 2 consecutive annual meetings
• Director actions are illegal, oppressive or fraudulent
• Corporate assets are being wasted or misapplied

Question 27

S corporation

Answer 27

• Pass-through taxation
• One class of stock
• No more than 100 shareholders, all of which are U.S. residents

Question 28

Franchise Tax

Answer 28

1% of margin.

• Deduct one of cost of goods sold, wages and benefits (capped at $300,000 per individual), or 30% of revenue
• Not due if revenue after exclusions is less than $300,000

Question 29

Waiver of Preemptive Rights

Answer 29

A shareholder may waive his preemptive rights. A waiver of the right to exercise a preemptive purchase is irrevocable if in writing, but it may be revoked if made orally.